More than half a century ago, in his classic paper on the economics of speculation, Paul Samuelson noted the perverse rewards to knowing stuff just slightly before everyone else.
He asked readers to imagine someone who, somehow, consistently received crucial information one second before everyone else.
As he pointed out, the social value of that extra second would be minimal; but the private rewards could be huge.As regular readers know, with private label structured finance securities including CDOs, Wall Street's informational advantage was not an extra second but rather weeks. Wall Street had this informational advantage because it owned the firms that were servicing the underlying collateral.
Naturally, when the collateral stopped performing, Wall Street was only too happy to "short" these securities before market participants received this performance information.
Your humble blogger has been saying since the very earliest days of the financial crisis that we need to bring transparency to all the opaque corners of the financial system so as to eliminate Wall Street's informational advantages.
It is these informational advantages that give rise to unproductive finance and our current financial crisis.